MSPs: Making Sure the Price is Right

Pricing is never easy. Set a price too low and you leave money on the table. Too high and the competition will eat you for lunch. Not only that, but as the technology and services market moves forward, there are an array of pricing approaches to choose from. This blog will review the basic analysis you should do to make sure the prices you set for your services will support your business goals and objectives.

First Determine Your Target’s Needs

Before pricing any service it’s important to determine the needs of your target market. Smaller companies have lower revenues in general and are constrained in their ability to fund expensive services. They look for low-priced offerings providing basic levels of support. Nevertheless, all businesses are interested in getting the best value for their investments (read largest ROI) and most will favor higher value, versus a lower price, if the value price fits within their budgetary constraints.

While a la carte pricing options may sound like they give the client the most choice, this type of pricing structure can quickly lead to problems. First, it can quickly become a service delivery nightmare to for your technicians to manage and support a growing number of unique customer engagements. Second, most customers prefer to select from among a small number of service bundles/tiers with increasing levels of capability. SMB customers want more comprehensive services and see strong value in attractively priced bundled managed services.
Establish clear business value for each offering. SMBs buy on value to their business ─ price is important but not paramount. Know your prospect’s or customer’s business and how you can add value. When you have this information, you can price based on the specific value you can deliver to each customer.

Consider differentiating with advanced and specialized services that include system availability guarantees. MSP customers are interested in getting more from their managed service providers than just a promise to respond rapidly to problems. If they are going to outsource portions of their IT management they want their providers to have “skin in the game” and to take on some of the responsibility for IT service delivery by providing service availability and/or performance guarantees.

Is There a Way to Specialize?

Take some more time to research the needs of your potential target market. One way to increase profitability is to target a smaller number of larger customers rather than a larger number of smaller customers for greater efficiency and profitability in your service delivery processes. Of course, larger customers will have more complex IT needs, so you need to make sure that your MSP can support these needs.

Perhaps there’s an opportunity to focus on a particular vertical, in order to help make your sales and marketing more efficient and more effective. By specializing, you can also develop an in-depth understanding of your customers’ business environment. This specialized knowledge can translate to higher value services and the higher pricing that goes with those services.

Price by the Value You Deliver

Buying an ongoing service requires a level of trust; customers will pay more for providers they trust to provide good service. Pay attention to competitive price ranges but don’t be fooled into thinking that the lowest price always wins. It doesn’t. Faster growing MSPs will tell you that the best value service usually wins.

The biggest value of managed services to a small company may be doing things they do not have the skills or resources to do themselves. In this case, your differentiation must focus on how effectively you will provide the service and why you are so much better than your rivals.

Do your skill levels provide a more certain outcome?

Will you be quicker or just more effective than you competition?

Will you pass on knowledge or help train internal personnel?

In comparison, mid-sized companies will likely pay more for their managed services. But, as we’ve said, they usually have more complex needs. They may need proof of regulatory compliance or training, liability insurance coverage for service provider staff visiting their locations, guaranteed service levels and any number of other items. If mid-sized companies are your target market, understand what these needs are and don’t be fazed by low-priced bids from other MSPs who don’t understand the more advanced requirements of this target market.

The Value of Value-Based Pricing

The plain fact is, while every purchaser wants to make sure they pay the lowest price for a commodity, most business decision-makers elevate value over price when purchasing products or services for their business (particularly if it’s their own business). Small- and medium-size businesses are much more concerned about buying from a trustworthy service provider with skills and expertise beyond what they have in house. It’s only if they perceive they’re buying a commodity that they will assign a low value to the service and be more concerned about its price.

Value-based pricing allows MSPs to compete on the basis of their skill as an MSP (e.g., the ability to provide guaranteed business outcomes and to demonstrate how the contracted results will be delivered). For example, consider the pricing of a remote monitoring service. A cost-based pricing approach might result in a per-device price of $X, where X is some multiple of the cost of providing the service. Without any additional information, a client might see no difference between MSP A’s managed monitoring service and MSP B’s service. Both MSPs will talk about the number of prestigious clients they have, the number of devices they monitor successfully, and their ability to respond and deal with issues. If there’s no real differentiation, the likely outcome is that the client will chose the cheapest option.

However, a value-based pricing approach is designed to provide higher gross margins and prices services based on their value to the client. In the case of a remote monitoring service, what does the client hope to achieve by outsourcing monitoring? Perhaps the client wants to:

free-up internal resources

gain 24 x 7 coverage without having to resort to shift work or overtime pay, or

benefit from fewer employee disruptions and help desk requests created when users download untested patches or inadvertently introduce malware

These changes would drastically increase their employee productivity, generating savings right there. Moreover, the positive financial and business impact could be even greater.

Showing clients how MSP services will reduce disruptions and how they can be reliably delivered, enables the price of the monitoring service to be positioned against the business cost of doing nothing or of using in-house staff. Correctly done, the value delivered will be an order of magnitude more than the price of the service.

Describing the processes used, the details of prior experience, and how the MSP’s unique approach will ensure that benefits are achieved, generates trust, demonstrates differentiation and provides value even during the sales process.

Seeing that value, clients are more likely to compare capabilities and service attributes to those of competitors, rather than to directly compare prices. If the comparison is favorable, they will happily pay a higher price for the additional, but very real, value delivered.

Other Considerations to Price for Profitable Growth

The pricing of managed services, like the pricing of any complex solution, is a topic to which we could devote an entire book. Our goal in this blog is to provide some general guidelines and to identify key areas for consideration. As with most pricing decisions, there is no single correct answer or approach. Much depends on the nature of the services in question, your reputation within your target marketplace and customer set, and the level of competition you face.

Eliminating Unplanned and Non-Paid Work

An important success factor for growing a profitable managed services business is managing and controlling unplanned and unexpected workloads. What this means, in reality, is being confident that the resources allocated to manage the services contracted by each client will be totally adequate to meet their needs.

Knowing what resources will be needed, together with the cost of those resources, means that you can price your services profitably. Also, understanding how much technical and engineering staff time will be needed leads to optimized utilization, enabling your staff to reliably service multiple customers per time period. Finally, by constantly working on staff productivity, you’ll be able to support new service offerings and generate more revenues, from both new and existing customers, without big increases in your workforce.

Numerous steps can be taken to minimize unplanned work. Some of the most frequently cited include:

Take a proactive stance to end-user training particularly with respect to security and new application deployments.

Consider producing simple written guidelines to address common issues, such as password management, that can be easily accessed and readily understood. A large portion of helpdesk calls relate to lost or forgotten passwords.

Insist on standardized device configurations (including the actual devices) and software sets. These are much easier to manage, troubleshoot and rebuild when issues do occur.

Mandate standardized policies and processes for software updates and downloads – restrict end-user administrative rights. By strictly controlling end-user actions and the applications that can run on their devices through policy. Our most successful MSP customers suggest being flexible yet consistent with pricing

Calculating Existing Service Delivery Costs and Gross Margins

Using value-based pricing will ensure that you are maximizing profits ─ but you must know the cost of your service delivery efforts first.

The cost of service delivery is the sum of the (monthly) cost of your billable employees plus the monthly (amortized) cost of your infrastructure and other expenses. These two costs then can be summed and divided to determine an average cost per user or per device per month. For ease of description we’ll refer to this as “cost per seat per month” and leave you to decide if that means per user or per device.

It’s important to have a full understanding of your service delivery costs so that you can pick a pricing approach that maximizes your profit. It’s useful to first allocate your services to categories, as each category requires different skill levels, tools and other expenses:

General support

Centralized monitoring, management and remediation

Administrative

Strategy and planning

Sum up the total of all appropriate costs per category on a monthly basis and divide by the total number of seats to determine your average total service cost per seat per month. While you may price based on your per device costs today, consider developing a per-user approach for the future. Increasingly employees have multiple devices that will need to be managed but the costs of supporting additional devices are marginal versus the cost of supporting additional users.

Next calculate your current average monthly revenue per seat by category. In an ideal world this would be your current price but if you have multiple service elements within a category or you allow discounting, the average revenue may differ from your standard price. Your gross profit margin is the difference between the revenue and cost, divided by the revenue:

(Revenue – Cost) / Revenue = Gross Profit Margin

It’s also helpful to know what your overall average cost and revenue per employee is and how additional services will affect those averages. Your average cost per employee is generally the total cost of running your business – payroll and expenses – divided by the number of employees, including yourself. Your average revenue per employee is your total revenue from services and service-related activities divided by your total number of employees. That’s all employees, not just your technical team. Include all sales, marketing, finance, admin and management staff, etc.

New services should add to your average revenue per employee as quickly as possible but without adding significantly to your average cost per employee. That way you know you will be increasing your gross margins. If you are investing in new skills to expand your services, how quickly will the average new services revenue per employee add to the overall average? Any plan to add new employees that only increase service revenues from new customers, or only a portion of existing customers, needs to be carefully considered. Ideally, new services will quickly be taken up by both existing and new customers and will raise the overall average revenue per employee.

Kaseya’s Annual MSP Pricing Survey

Unfortunately, there is no Magic 8 Ball that will tell you the exact price to set for your services. You need to research both the average pricing in your target market (whether that is as limited as one city or as broad as the world).

One resource is Kaseya’s Annual Global Pricing Survey. Download the latest version and see how our survey respondents answered questions on pricing.

Doug Barney was the founding editor of Redmond Magazine, Redmond Channel Partner, Redmond Developer News and Virtualization Review. Doug also served as Executive Editor of Network World, Editor in Chief of AmigaWorld, and Editor in Chief of Network Computing.